The social market economy in the age of globalization - problems and perspectives

Tesis (Bachelor) , 2008 , 52 Páginas , Calificación: 1,8

Economía de las empresas - Política económica

The Federal Republic of Germany is a democratic and social federal state (Art. 20). In 1948, the Social Market Economy was introduced in Germany by Ludwig Erhard as the economic system. Since then, Germany has been acting under this guiding principle and found a legal affirmation of the concept in 1990 as it fixed the Social Market Economy as the basis for the economic union of the Federal Republic and Democratic Republic of Germany (“Grundlage der Wirtschaftsunion ist die Soziale Marktwirtschaft”, Art 1-3). In times of economic growth and prosperity, the Social Market Economy seemed to work well and further expansion of the social system did not cause any serious problems, but soon the circumstances changed. Important driving factors and trends like the reunification, the demographic development and the globalization have altered the conditions for successful economic policy. In the last decade, excessive national debts and high unemployment rates have revealed a serious crisis and initiated a strong debate whether the Social Market Economy is still able to adapt to and master the challenges in the age of globalization.

Table of Contents

List of Figures

1 Introduction

2 Social Market Economy in the Globalization
2.1 The Concept of Social Market Economy
2.1.1 Definition
2.1.2 History
2.1.3 Current Situation
2.2 Globalization
2.2.1 General Characterization
2.2.2 Challenges of Globalization
2.2.3 Discussion of Economical Impacts and Mechanisms
2.3 Current Problems and Reforms
2.3.1 Identification of Problems
2.3.2 Agenda 2010 and Recent Political Reforms

3 The Case of Denmark
3.1 The Danish Success Story
3.2 “Flexicurity” - The Danish Model
3.3 Evaluation of Similarities and Constraints
3.4 Summary
3.4.1 Renovation of the Social State
3.4.2 Mastering the Challenge of Globalization
3.4.3 Lessons of the Danish Case

4 A European Social Model
4.1 The European Idea
4.2 Social Market Economy in Europe
4.3 Potential Benefits and Threats of a Single European Model
4.4 Conclusion

5 Discussion of Perspectives and Alternatives
5.1 The Probation of Social Market Economies
5.2 Alternatives and Justification of the Social Market Economy
5.3 A National Action Plan

6 Conclusion

Reference List

Appendix

Honorable Declaration

List of Figures

Fig. 1: Economic Key Figures 2005-2007

Fig. 2: Key Figures for Macroeconomic Trends in Germany

Fig. 3: Budget of the European Union

1 Introduction

The Federal Republic of Germany is a democratic and social federal state (Art. 20) .

In 1948, the Social Market Economy was introduced in Germany by Ludwig Erhard as the economic system. Since then, Germany has been acting under this guiding principle and found a legal affirmation of the concept in 1990 as it fixed the Social Market Economy as the basis for the economic union of the Federal Republic and Democratic Republic of Germany (“Grundlage der Wirtschaftsunion ist die Soziale Marktwirtschaft”, Art 1-3).

In times of economic growth and prosperity, the Social Market Economy seemed to work well and further expansion of the social system did not cause any serious problems, but soon the circumstances changed. Important driving factors and trends like the reunification, the demographic development and the globalization have altered the conditions for successful economic policy. In the last decade, excessive national debts and high unemployment rates have revealed a serious crisis and initiated a strong debate whether the Social Market Economy is still able to adapt to and master the challenges in the age of globalization. Globalization proceeds inexorably and affects all areas of life. More and more companies are relocating their production plants into low-cost countries in Eastern Europe or the Far East as a result of Germany’s labor costs, which seem far too high. Nowadays, globalization is held responsible for nearly every reduction of jobs and social disparities, so that many people are afraid of its consequences.

At the same time, several Scandinavian countries are known for their well-functioning economic policy and seem to have found an answer to the globalization challenge maintaining a high standard of living, social justice and international competitiveness. Even if in Germany the economic revival of the last two years has attenuated the debate, a fundamental solution to the problem has not been found and the serious continuing challenge of the globalization cannot be neglected.

The fast European Integration process as one expression of globalization yields many unexploited chances and opportunities. For a few years, an increasing number of politicians have been postulating the amendment of the European Integration by a social dimension. A European model of Social Market Economy would promise a solution to the current problems. Indeed, it is worthwhile and important to search for and discuss new models and opportunities in order to find answers to the challenges of globalization.

This thesis aims at making a contribution to the comprehension of the current debate whether Social Market Economies are still able to deliver what they promised and whether the concept is still adequate facing the challenges of globalization. It remains to be evaluated what needs to be done to fulfil the demands of modern societies. The thesis furthermore analyzes the question whether Social Market Economies are damned to fall behind other emerging societies in the fast developing world economy. The objective of the thesis is the investigation and evaluation of potential perspectives and opportunities of the German Social Market Economy.

Therefore, the thesis will first inspect how precisely the globalization is challenging the Social Market Economy. After the identification of the main problems and developments, the thesis will discuss in what way reforms such as the Agenda 2010 and other current programs solved the problems. Having identified the main problems and discussed actual reforms and approaches, an analysis of Denmark including a comparison of the Danish model of Social Market Economy will investigate if it is possible to take advantage of their success. Subsequently, potential benefits of a European model of Social Market Economy will be examined and discussed. It will be clarified whether a European model constitutes an efficient solution to the current crisis.

Concluding these perspectives, the thesis will try to give an outlook on how the Social Market Economy in Germany can adapt to and even benefit of globalisation.

2 Social Market Economy in the Globalization

2.1 The Concept of Social Market Economy

2.1.1 Definition

The concept of Social Market Economy was first introduced by Ludwig Erhard with the monetary union on 20th June 1948. More than the enactment of a certain, widely accepted policy the monetary union was rather a solo by Erhard and some of his colleagues like Mr. Müller-Armack (Cassel & Rauhut, 1998, p. 4). “We are committed to two big moral objectives: freedom and social justice.” Therefore, they tried to implement an economic policy which combines the principle of [market] freedom with the principle of social justice (Müller-Armack, 1956, p. 390). Although Germany maintained this principle of economic policy for 60 years, the term “Social Market Economy” does not have a generally accepted and precise definition but induces a lot of interpretations. Nevertheless, it has become a widely spread and accepted politico-economic overall concept, which aims at competition and social balance at the same time. Nowadays, the principle can be found in Article 20 of the German Constitution and in the preamble of the unification treaty in 1990 (Althammer, 2007, p. 193).

It has its roots in the teachings of Adam Smith and supports liberal positions such as the division of labor, free trade, and competition. There is a consensus that these traits, basically, guarantee economic growth, performance, as well as efficiency and, therefore, the best economic system. Nevertheless, social security and, therewith, the redistribution of income are favored objectives, which have been set from the very first, so that as many people as possible benefit from the achievements of the market economy (Paraskewopoulos, 1998, p. 225). However, the implied principle of subsidiarity signifies that social security is only required to maximize individual opportunities for development and, therefore, is rather a system of help for self-help. Based on this, personal provision, individual responsibility, and private initiatives have priority, which naturally demands that everybody has the means to accommodate himself and his family. This corresponds to the traditional image that a society is configured from the bottom up (Cassel & Rauhut, 1998, p. 12). Also, Müller-Armack once said that the social purpose must be ensured without disturbing the functioning of the market (Müller-Armack, 1956, p. 391).

Summarizing, the Social Market Economy is based on five principles and values. Primarily, the concept of Social Market Economy has the duty to respect and ensure the freedom of the individual, because freedom is a foundation of a pluralistic society enabling every individual to pursue its own wishes and self-actualization. The only restrictive factors are the common welfare and the freedom and rights of other human beings (Schlecht, 1998, p. 37).

As competition is the second dominant principle, the consumer is in the main focus of Social Market Economies. Consequently, efficient production, innovations and technical progress are enforced, free consumption arises and finally income is distributed depending on performance. Furthermore, competition is known to prevent any oversized concentration of power and, therefore, guarantees, the rights of the citizens (Schlecht, 1998, p. 38).

Thirdly, Erhard stated that, notwithstanding the fact that the majority of people will gain its income through this market process, a substantial need for amendment through socio-political measures remains. However, the intentional accentuation lies on the following: The more successful the economic policy is, the fewer social services are needed. Thus, socio-political services are a fundamental component of the Social Market Economy, but only as a clearly subsidiary element.

Fourth, the durable protection of the economic order requires conscious state forming and interventions. An effective competition policy in order to perpetuate intensive competition is an important duty of the state.

The fifth principle is formed by constitutive and regulative general conditions. They include private property, liability regulations, convertible and stable money as well as free formation of prices in open markets, freedom of contracts and establishment. Policies need to be constant and reliable and must provide public infrastructure and regulations for environmental protection (Schlecht, 1998, p. 38). It can be concluded, that Social Market Economy is a general economic policy concept, an open model for a flexible social and economical arrangement – depending on social and societal objectives and scarcities (Schlecht, 1998, p. 36).

2.1.2 History

Ludwig Erhard made a decisive contribution to the enactment of the Social Market Economy as he enforced the monetary reform on 20th June 1948. Other important influences on the conception originated from Walter Eucken, Friedrich August v. Hayek, Alfred Müller-Armack, Wilhelm Röpke, Alexander Rüstow, Franz Böhm and Oswald v. Nell-Breuning (Gutmann, 1998, p. 50).

In the following years, the social and economic order was built according to the Social Market Economy. With the help of Ludwig Erhard, the concept mastered its first major challenges in form of the Korea-Crisis in 1950/51 so that a relapse into a command economy could be prevented. Instead, the Social Market Economy was soon held responsible for the German so-called “Wirtschaftswunder” (Cassel & Rauhut, 1998, p. 4). Dynamic growth rates, declining unemployment rates, stable level of prices, and increasing real wages led to a general acceptance of the system and even the Social Democratic Party renewed its programmatic position under the influence of Karl Schiller, Heinrich Deist and Herbert Wehner with the “Godesberger Programm” in 1959 (Schlecht, 1998, p. 39f).

Also, the Independence of the Bundesbank, standing for the principle of monetary stability, and the Law against anticompetitive practices were finally established against all resistance (Streit, 1998, p. 180). First reforms for social balance like the “Wohnungsbaugesetze” were implemented, but social measures were still guided by the principle of subsidiarity and, thus, provided a framework in which acting on one’s own responsibility was encouraged. This contained for example the “Tarifsvertragsgesetz” in 1949 and the “Betriebsverfassungsgesetz” as well as the “Sozialhilfegesetz” in 1961. Pensions became dynamic and wage-related and, therefore, they were a substitution of wage instead of a grant. On the other hand, privatizations as Preussag in 1959, VW und Veba in 1961 and 1965 were an important withdrawal of the state. Internationally, Erhard achieved to fix some of the liberal principles in the Treaty of Rome in 1957 (Cassel & Rauhut, 1998, p. 14).

The 60s were characterised by a heavy shift in favor of a stronger influence of the state. As a response to the first economic recession in 1966/67 and cyclical fluctuations, Keynesian teachings became very popular. The integration of the world economy advanced, public trade cycle policy and macroeconomic governance became established elements of economic policy. In spite of all this, the continuous inflation could not be repressed (Schlecht, 1998, p. 41).

Nevertheless, the 70s led to a period of extensive interpretation of the idea of the social state, so that the social component became more important than economic order. Consequently, economic necessities and financial solidity were not upheld. Bureaucratization, an inflation of expectations towards society and the state, the precedence of distribution policies heavily constrained economic efficiency, dynamics, flexibility, and the process of adjustment. The state and its representatives became responsible for employment levels. Willy Brandt significantly raised the share of government expenditure in GDP and the situation degraded to stagflation. High inflation occurred combined with economic recession. The years of full employment ceased and unemployment increased. Looking back, this can partly be explained by the negligence of the supply side and national debt. While Germany experienced a financial and socio-political “overkill”, core elements of the Social Market Economy persisted (Schlecht, 1998, pp. 42-44).

In the years of the 80s, a reflection on and return to the fundamental conception of Social Market Economy took place, changing the paradigm and the government in 1982. The new accentuation of regulatory policy aimed at growth, employment and structural change. The Keynesian approach was widely dismissed. Instead, budget consolidation, the reduction of the state’s ratio, debureaucratization, privatizations and fiscal reforms recreated economic dynamics and confidence finally building the basis for the German Reunification (Schlecht, 1998, p. 45).

The establishment of a monetary, economic and social union on 1st July 1990 and, therewith, the establishment of the Social Market Economy throughout Germany as well as massive financial transfer payments to the new federal states hugely distinguished the 90s. Notwithstanding the fact that the reunification took course without serious problems and that considerable improvements in the assimilation between East and West Germany have been made, a sustainable and self-supporting economic process could not be set up for a long time (Schlecht, 1998, p. 45).

2.1.3 Current Situation

Facing the new millennium with four and a half million unemployed, a huge budget deficit and economic stagnation, the new government, again led by the Social Democrats and Gerhard Schröder, finally had to realize that the current interpretation of the social state would not be able to master future challenges nor to guarantee the maintenance of the very high welfare level. Social security had become more and more a promise of full supply, which seemed to be irreplevisable by then (Streit, 1998, p. 182). It seemed obvious that everybody had to lower his or her standards, expectations, and to work more in order to transform society to fit for the future.

Therefore, the Agenda 2010 finally began to respond to the necessity of deeper reforms. However, after two years of economic growth in 2006 and 2007, a balanced national budget and a reduction of unemployment rates, the atmosphere again changed. The Social Market Economy went through all these crises, but, nevertheless, it has lost much of its former glamour and its attractiveness for foreign countries (Cassel, 1998, p. V). After 60 years, the Social Market Economy in Germany is in a conceptual crisis and discredited, despite all exporting and stability successes and the still high niveau of welfare According to Cassel and Rauhut (1998, p. 24), it is even degenerated to an empty phrase, used to argue arbitrarily in nearly every political argumentation, because politicians and economic scientists have failed in finding sustainable solutions to essential conflicts and changing challenges of globalizations and other trends. It seems crucial to bring to mind the original idea of the economic concept. Social Market Economy was never meant to be a set of rules with clear acting guidelines. Its adaptability can therefore be seen as its strength and guarantee for timelessness as well as its biggest weakness. While the liberty of the market is relatively precise in its meaning, debates and discussions have traditionally been strong about the question what social security really means and to which extent it should be realised in a welfare state. Although its openness to newer developments, problems and ideas, it cannot be blamed for the current situation. Being open to different accentuations of its two components “Social” and “Market Economy”, it is not surprising that different interest groups and parties pursue different and sometimes even contradictory objectives under the same maxim (Gutmann, 1998, p. 51). There remain only a few who argue that it is sufficient to realise a free market, because the result of a big Gross Domestic Product would facilitate social compensations. Despite all this, “social” became a likeable euphemism sometimes legitimating even unsocial reforms. It can be stated, that the element of social balance has often been dominated by opportunistic majority-seeking (Streit, 1998, pp. 180-182). Cassel and Rauhut (1998, p. 23) even claim that chances of a proper implementation of Social Market Economy are extremely low in a parliamentary-democratic system. It seems to be at least part of the problem that the term „social compensation” is ambiguous and, hence, not suitable for control of success and that it does not create a strong feeling of obligation to the concept.

Nowadays, the social state follows the principle of insurance, social autonomy, and pluralism of institutions (Althammer, 2007, p. 194). There are three layers of sociality: First, there are social effects of competition itself such as low prices. Erhard already assigned an automatical dependence as he stated in 1954: “The higher the level of economic freedom, the more social the economy is” (Erhard, 1954, p. 119). Second, there are social effects of public regulatory policies, and, third, there are social effects of public redistribution (Althammer, 2007, p. 198).

Currently, the interpretation of the component of social policy favors a relatively vast design and its social security net is one of the most expanded in the world (Paraskewopoulos, 1998, p. 228). Its expressions are the three pillars: Basic social care (social benefits and unemployment compensation), several further transfer payments like BAföG, child and housing benefits as well as social insurances in the form of health, accident, nursing, pension and unemployment insurance. At the same time, a relatively extended interpretation of freedom can be observed, although some sectors are not marked by competition and the labor market is completely exempted from competition (Cassel & Rauhut, 1998, p. 17). After all, it can be concluded that social security instead of economical progress became the center of attention and that there are several violations of the principle of subsidiarity. Further development was due to happen as a result of rent-seeking and political processes.

There certainly is a conflict of aims between social security, redistribution and economic efficiency (Paraskewopoulos, 1998, p. 224). However, today, it can be concluded that the economic political practice has essentially removed itself from the original conception and, yet, has not accomplished the conflict of aims towards a sustainable solution and reform of the German model of Social Market Economy (Paraskewopoulos, 1998, p. 224).

In times when the economic situation is unstable, when the budgetary situation is fierce, when unemployment rates are still high and trends like demographic development and especially the globalization are still seriously challenging the German society, there is a need to rethink the model of Social Market Economy. On account of this, it is important to clarify the omnipresent term of globalization and to define in what way society is precisely challenged.

2.2 Globalization

2.2.1 General Characterization

One of the most challenging trends for the Social Market Economy is definitely globalization. The age of globalization can be defined as an era of worldwide integration of economic, technological, sociocultural and political processes finally unifying people of the world into a single society (Croucher, 2004, p. 10).

Fast technical progress in modern information and communication media, rising cultural exchange and increasing mobility of people are some expressions of globalization.

Economically, globalization, ahead of all other things, means international and global competition. More and more economic interconnections are established as well as international trade on financial and goods markets is taking place, is even of growing importance. The most important characteristics of globalization are worldwide deregulation and the coalescence of global markets, the collapse of the Eastern Bloc, the creation of a European domestic market along with the introduction of the Euro and the Eastern Enlargement as well as processes of regional integration and the emergence of supranational bodies in different parts of the world such as free trade agreements like NAFTA, MERCOSUR, and ASEAN (Kesting & Nielsen, 2003, p. 369).

It can be concluded that interdependencies affecting all areas of life are increasing in number and strength. In this context, it also needs to be stated that globalization has always taken place in human history. Nonetheless, globalization has without doubt accelerated enormously since the downfall of the iron curtain due to political changes as well as technical progress and, nowadays, seems to be unstoppable. The world and its interdependencies and, most notably, its economic integration have become very complex and even too complex for most so that due to a general lack of competences it is hard to understand and explain current proceedings (Weizsäcker, 2000, p. 48). As a result, many people perceive globalization as a threat and are heavily alienated by it. An anti-globalization movement emerged, which sees more disadvantages than advantages.

Nevertheless, Weizsäcker (2000, p. 47) claims that throughout the 20th century all levels of society in Germany have benefited from globalization. Generally, the material living standard has at least known a tenfold increase, but the benefits can also be measured in the individualizations of lifestyles, rising local mobility, an essential reduction in working hours and, thus, greater autonomy in spending one’s time. Further manifestations are an increasing variety of products and more, smaller industrial sectors with, at the same time, augmenting productivity. Globalization also means the refinement of division of labor and increasing professionalization (Weizsäcker, 2000, pp. 13-15). Moreover, in the German context, it has to be stated that the prosperity of the society like in all industrialized countries has profited from free world trade. The German “Wirtschaftswunder” is a prime example of export-led growth and, insofar, Germany has benefited significantly by free international trade (Weizsäcker, 2000, p. 50). After the Second World War, it can be ascertained that the doctrine of beneficent effects of international trade became accepted. Even economists have widely agreed upon this. In practice, the GATT system pursues this objective but free international trade is not realized yet.

2.2.2 Challenges of Globalization

However, the actual public opinion in society definitely differs strongly. The current debate in the media is marked by negative reports about the relocation of firms leaving Germany and sometimes thousands of unemployed. The explanation is nearly always the same, stating that the business location “Germany” is no longer competitive and that production has to be relocated into low-cost countries in order to gain benefits of lower labor costs. Indeed, while the historical benefits and basic positive model of globalization are undoubted, the face of globalization has changed and its effects have become more tangible. Furthermore, it is important to understand that globalization has always required ongoing adjustments and reforms. In order to realize the positive welfare effects, a couple of challenges must be mastered.

As a main challenge, the increased stress of worldwide competition can be identified. Since the economic involvement of countries with lower living standards, there is an excess supply of unqualified employees (Weizsäcker, 2000, p. 53). Consequently, unqualified employees in industrialized countries in Europe have the impression of soon losing their job. Instead, in the U.S., unqualified employees rather feel the compulsion to reductions of wages or social services (Kesting & Nielsen, 2003, p. 372). Thus, a second challenge emerges. There is an enforced pressure for industrial restructuring because of free trade and free capital movement towards Central and Eastern Europe (Kesting & Nielsen, 2000, p. 374). This structural change needs active designing, because it creates winners and losers, at least for the short term.

Moreover, the globalization enforces the institutional competition, which builds up the pressure to reduce taxes and deregulations, environmental and social policies (Hillebrand & Welfens, 1998, p. 415). The institutional competition has intensified due to deeper international market integration and the controlling function of national economic policies by financial markets (Kösters, 1998, p. 442). Nevertheless, this has also the positive effect of identifying best political practices in order to achieve a new and more efficient institutional equilibrium (Hillebrand & Welfens, 1998, p. 405).

Another challenge often been referred to is that globalization reduces the repertoire and effectiveness of national economic policies (Kesting & Nielsen, 2003, p. 370), empowering world markets and multinational companies to determine national policies (Weizsäcker, 2000, p. 48). This can be justified in policy constraints such as the disappearance of macroeconomic instruments. It has become impossible to effectively control money supply and interest rates. In consequence, the effectiveness of national monetary policy is undermined and the economy becomes vulnerable to speculative capital movements. Furthermore, Keynesian demand management appears to be less effective due to spillover effects of demand expansion across borders (Kesting & Nielsen, 2003, p. 370). Notwithstanding this, Denmark has found a way to avoid negative impacts as will be shown further in the fourth chapter. Countries of the European Union are institutionally constrained by the three percent deficit limit imposed by the EU Stability and Growth Pact (Kesting & Nielsen, 2003, p. 374). As a further challenge for governments, the need of enhancing the attractiveness for international mobile capital as well as creating and guaranteeing functioning, flexible markets can be determined (BMWI, 2008). In addition, some economists attribute also challenges regarding ideological implications to globalization. As supranational organizations like OECD and IMF consistently advocate neo-liberalism, arguments of competitiveness and flexibility dominate debates about globalization (Kesting & Nielsen, 2003, p. 371). However, the main focus and emphasis of society and economy necessitates clear definition and alignment of strategies and measures.

In summary, globalization can, thus, be seen as a challenge to a country’s and a society’s ability to determine its position and implement necessary reforms in order to cope with global stress of competition and to develop national strengths to create comparative advantages.

2.2.3 Discussion of Economical Impacts and Mechanisms

There is a consensus that globalization has the effect of promoting professionalization and international division of labor (Weizsäcker, 2000, p. 15). Therefore, there is a need for industrial structural change. Furthermore, there is also consensus that globalization intensifies international competition, but as Germany has a relatively high standard of taxes, labor costs, environmental obligations, and an extensive net of social security, its economy is often assumed to be non-competitive (Weizsäcker, 2000, p. 234). Following the most popular interpretation, it is argued that more favorable investment opportunities in foreign countries lower social measures and that social services, in the end, become cost-factors and, therefore, an important competitive disadvantage. High unit labor costs have the result of investments avoiding German and preferring foreign locations (Paraskewopoulos, 1998, p. 234). Because globalization undermines capacities for compensation and the political basis for financing the welfare state, tax cuts and reduction of social security contributions are the result. Thus, globalization is held responsible for the necessity of welfare retrenchment and, more directly, increased international competition is often blamed to be associated with downward pressure on wages (Kesting & Nielsen, 2003, pp. 370-372).

However, there is no consensus regarding this question. Other economists argue differently about those mechanisms and draw different conclusions. Weizsäcker (2000, p. 57) argues that each country has its own preferences towards the extension of social security and creates its societal system accordingly. The system of market economy is based on freedom of choice for consumers. The question, which social policy is executed, is finally a question how the national income is used or consumed. Consequently, there is also freedom of choice regarding the question how much of the income is raised through taxes and redistributed for social purposes. In all western societies, social services are funded through social security contributions and taxes. In Germany, social expenditures account for two thirds of the total public expenditure (Weizsäcker, 2000, p. 59). As a result of international competition, a national level of wages, the competition wage, is determined by national productivity. The competition wage consists of two parts: The individual wage is paid out directly to the employee, while the collective wage is collected by the state. In Germany, this happens through income taxes, care insurance, unemployment insurance, as well as contributions to the pension fund (Weizsäcker, 2000, pp. 62-64). As the height of the competition wage is fixed, which means that it is not affected by any changes in social policies, social policies only decide how much of the competition wage is used for public purposes and how much is directly paid out to the employee. For example, if the government decides to raise social contributions, the collective wage is raised, so that the determined competition wage is exceeded for a short time. This implies a decline of the domestic economy, high unemployment rates, lower exports, and higher imports. This situation cannot persist, so that wages would decrease and the competition wage would return to its original level (Weizsäcker, 2000, p. 61). As a result, the competition wage is not affected by social policies in the long term. Because of economical adjustments, this finally implies that the individual wage is reduced. Therefore, it can be stated that if market mechanisms work properly, social policy is not redistribution between employers and employees but instead redistribution between employees (Weizsäcker, 2000, p. 64). Hence, Weizsäcker (2000, p. 72) concludes that, in the long term, there are no competitive disadvantages arising out of higher levels of social services, and that national policy in the fields of social policies, taxes and environmental standards are not constrained at all by international competition.

Subsequently, there is also disagreement concerning the constraints of national economic policies. In contrast to the argument that competition has a downward effect in these fields, Weiss (2002, p. 2) concludes that the state has much more room for maneuvring than it is generally assumed. Globalization even has enabling effects according to him. For example, Weizsäcker (2000, p. 93) argues that a state has autonomy in the determination of levels of profit taxes. The higher the tax, the lower the competition wage. This means that higher taxes are passed on the employees and, thus, do not constitute a competitive disadvantage.

The solution finally seems to be that adjustment is the basic condition for the functioning of those long-term market mechanisms in order to master the challenges of globalization. This is, however, currently not given in Germany due to the still highly inflexible labor market. Hence, negative consequences rather follow from market failures and the failure of policies such as subsidy policies. Therefore, social and political impacts of globalization vary significantly dependent on the mediating role of the institutions of nation states (Kesting & Nielsen, 2003, p. 372).

Consequently, since the 80s, Germany has so far been a loser of increased international competition, but altogether has taken advantage of globalization (Hillebrand & Welfens, 2008, p. 412). To sum up, an a priori overall negative impact of globalization cannot be ascertained. Indeed, Germany has so far rather been a winner of globalization, but is actually struggling with the effects because of its high rigidity of markets and inability to adapt and reform according to global trends and demands. Globalization is seriously challenging the German Social Market Economy in different ways and is currently producing several problems in the German economy and society.

2.3 Current Problems and Reforms

2.3.1 Identification of Problems

In conclusion, various problems of different nature can be diagnosed in the current situation. As it has been shown above, the globalization, which has increased the stress of competition essentially, has superficially revealed that labor costs are too high in Germany. Based on the problem of worldwide excess supply of human capital, this seems to have an obvious negative impact on unemployment rates. Even though this does not constitute a problem in economic theories in the long term, the obvious problems indicate that the long-term market mechanisms are not properly functioning. Germany, hence, faces a problem of inefficient institutions causing difficulties of adjustments such as the rigidity of the labor market, which is partly due to high protection of dismissals. However, if this should not be the case, which appears to be very unlikely in view of the high unemployment rates, then there is a serious communication problem. These mechanisms are by no means apparent for the population. Therefore, a further problem can be determined: The globalization has significantly increased the complexity of economical coherences. This becomes a problem because people are marked by a feeling of uncertainty, and, furthermore, politicians as well as some economists may fail in understanding the interrelations and in analyzing reasons and effects of certain policies. While economically the negative influences of uncertainty concerning domestic consumption are obvious, it can also be stated that the German society has become a society of dissent in questions where consensus would be important in order to define a strategy and reform agenda. Instead, the actual situation can easily be observed every day: The focus is put on debates that are characterized by social envy such as the one about high salaries of managers. Clearly, some salaries might be too high, but this is rather an ethical discussion. Furthermore, news about “capitalistic grasshoppers” and companies cutting jobs and pocketing record profits at the same time prevail in the media. Besides, companies evidently have to act on a maxim of profits, but the criteria are rational and predictable: Countries with qualified and inexpensive labor forces, a good infrastructure, passable living conditions for international managers, and convenient tax rates are an internationally competitive location (Weizsäcker, 2000, p. 55). Nevertheless, a moral condemnation of capitalism and neoliberalism has spread out and will neither be enough to reform the third largest national economy, nor will it help to solve any other problem (Stadler, 2007, p. 2).

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• Universidad: European Business School - International University Schloß Reichartshausen Oestrich-Winkel
• Calificación: 1,8
• Autor: Jan Lukas Nienhaus (Autor)
• Año de publicación: 2008
• Páginas: 52
• No. de catálogo: V90925
• ISBN (Ebook): 9783638054263
• Idioma: Inglés